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UK co-firing faces subsidy challenge

10 Aug 2012, 1.29 pm GMT

UK co-firing faces subsidy challenge

London, 10 August (Argus) — UK power generators co-firing biomass with coal would need to use a ratio of more than 85pc biomass from April next year to be more profitable than coal, after the government confirmed new subsidy levels in July.

Current subsidy levels for co-firing give 0.5 renewable obligation certificate (Rocs) per MWh of electricity produced, regardless of the ratio, meaning power generators lose €6.50/MWh compared with burning coal at today's prices, based on a plant efficiency of 34pc.

The new subsidy levels, which grades Roc bands depending on how much biomass is co-fired on a unit-by-unit basis, mean that at today's prices a unit would have to burn between 85pc and 100pc biomass to qualify for enough subsidy to be profitable compared with coal, according to Argus data.

Power generators co-firing at these levels would receive 0.7 Roc/MWh, or €4.06/MWh more for burning biomass over coal. Generators that convert to 100pc biomass will receive almost €20/MWh more than coal with a full Roc/MWh.

But co-firing at a ratio of less than 50pc biomass — which covers the majority of the UK's co-firing plants — will reduce subsidies to 0.3 Roc/MWh in the 2013-14 financial year, indicating that coal would be €10.56/MWh more profitable than before the previous Roc banding.

Co-firing economics could become increasingly tighter next year, if current pricing trends continue. Coal clean dark spreads have widened to €12.77/MWh from €4.76/MWh in the past year, based on a plant efficiency of 34pc. Coal prices have averaged $93.53/t so far this month, compared with $124.77/t a year earlier.

Similarly, emissions prices have fallen sharply since last year because of a huge oversupply of allowances in the market. The EU emissions trading scheme allowance contract for December delivery has averaged €7.14/t this month, down from €12.24/t in August 2011.

Pellet prices are showing signs of recovery after recent weakness, with the Argus cif northwest Europe index increasing every week since 27 June, when it hit a year low of €123.50/t. And the Argus forward curve shows prices rising to a midpoint of €136/t by the second quarter of next year, when the new co-firing bands come into force.

But co-firing subsidies will increase as the Roc banding period — 2013-17 — progresses. The subsidy for those using a ratio of less than half biomass will increase to 0.5Roc/MWh in the 2015-16 financial year. The subsidy for those using between 85pc and less than 100pc biomass will rise to 0.9Roc/MWh from 2014.

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